Most of the fixed-rate loans in Germany are concluded in the area of housing finance. In most European countries, only the variable interest rate on the loan is known in this area. Fixed-rate loans, on the other hand, have a long history in Germany and underpin the security concept of the Germans with regard to the financing of their own home. But fixed-rate loans also have their pitfalls. We compare these and the general characteristics and design features of a fixed-interest loan in our comparison:
Special repayment, full replacement and non-acceptance
In the meantime, it is common for bank customers to be granted special repayment rights up to a certain amount per calendar year in the loan agreements. However, this is not done automatically, but only at the customer’s request. The old contracts may not provide for special repayment rights.
If no special repayment right is provided, it is almost impossible to repay the loan in addition to the contractually agreed repayment rates. The bank is not obliged to accept all or part of the early repayment. The reason for this is the contractual agreement regarding the term and the repayment modalities.
There are only a few cases when a bank customer can partially repay or completely redeem his fixed-interest loan. This includes, for example, the sale of the financed property.
This was decided with a BGH judgment. The banks derive from the judgment that the borrower’s special benefit does not have to be accepted for all other life situations. The BGH has failed to adequately substantiate situations in which a bank, for example, has to accept full replacement.
But what has been sufficiently substantiated is the mathematical calculation of the financial damage that a bank incurs in the event of early redemption or special repayment. The bank incurs the damage whenever the repaid loan can be extended or invested at significantly worse terms than the terms originally agreed in the contract. The comparison is based on an interest curve, which the BGH has specified for all banks for such cases.
Quirky is also the fact that credit institutions can charge money if the loan is not drawn during the term. So if you only want to secure a loan in advance and only later decide on the possible drawdown, you should take into account that a high prepayment penalty must be paid in the event of non-acceptance.
Adjust interest rate
Since the interest agreement is fixed, it cannot be changed during the agreed period. Even if market interest rates have fallen in the meantime and the bank could grant a new loan with an identical margin, no bank will accept interest rate adjustments during the agreed fixed-rate period.
This is because the contractual arrangement applies to both sides. The bank also has no right to adjust lending rates when interest rates rise. This situation is annoying for borrowers who took out their loans during a high-interest phase when interest rates have fallen in the meantime. If you expect interest rates to fall, you should either only enter into short fixed-rate commitments (for example, only one year) or make your loan a floating rate.
Fixed rate loan can secure flexible financing
Interest rates for building finance have been falling for years. Anyone who took out a loan with variable interest rates a long time ago should replace it with a fixed-interest loan now or at the first sign of an interest rate turnaround.
Loans with variable interest rates can be canceled at any time
What many do not know: the loans with variable interest, also known as Euribor loans, can be terminated at any time with three months’ notice – without prepayment penalty.
When is the best time for a replacement?
The best time to replace a floating rate loan with a fixed rate loan is when the first signs of an interest rate turnaround appear on the horizon. Our infographic below illustrates this: